The first step under the check-the-box regulations is to decide whether there is an entity for federal tax purposes. Whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law.

The next step is to determine whether an entity is a business entity.

Certain business entities are by definition classified as corporation under Reg. 301.7701–2(b). Reg. 301.7701–2(b)(8) contains a list of foreign entities that are corporations by definition ("per se" entities).

A business entity that is not necessarily classified as a corporation under Reg. 301.7701–2(b) (an "eligible entity" ) can elect its classification for federal tax purposes under the rules of Reg. 301.7701–3. Those rules provide that

The activities of a disregarded entity are treated in the same manner as a sole proprietorship, branch or division of the owner.

The check-the-box classification regulations provide a default rule for an eligible entity that does not elect its classification. An election is necessary only when an eligible entity chooses to be classified initially other than under the default rule, or when the entity chooses to change its classification.

A foreign eligible entity is generally an eligible entity that is not created or organized in the U.S. or under the law of the U.S. or any State. The key for the default classification for foreign entities is whether the members have limited liability. A foreign eligible entity is an association and thus a corporation if all of its members have limited liability. A foreign eligible entity is a partnership if it has two or more members and at least one member does not have limited liability. The entity is a branch or proprietorship if it has a single owner and that owner does not have limited liability. The entity is a disregarded entity if it has a single owner and that owner does not have limited liability with respect to that foreign eligible entity.

The default classification of an entity in existence prior to January 1, 1997, is generally the classification that the entity had claimed prior to that date. A foreign eligible entity is treated as being in existence prior to January 1, 1997, only if the entity’s classification was relevant at any time during the sixty months prior to that date. If a foreign eligible entity’s classification was relevant prior to January 1, 1997, but the entity did not claim a classification, the entity’s classification default classification is determined under the prior classification regulations.

An entity that was formed after December 31, 1996, and before October 21, 2003, has a classification even it is it not relevant. An entity that was formed on or after October 22, 2003, has a classification only when it becomes relevant.

A foreign eligible entity is relevant when its classification affects the liability of any person for federal tax purposes.

A special rule applies to foreign eligible entities in existence and relevant on May 8, 1996, and on the per se corporation list of Reg. 301.7701–2(b)(8). Under this rule, such entities may retain their claimed classification after January 1, 1997, if

An entity whose initial classification is determined by default retains that classification (without regard to changes in the members’ liability) until the entity makes an election to change its classification.

An eligible entity may affirmatively elect its classification by filing Form 8832, Entity Classification Election . The election is effective on the date specified on Form 8832, or if no date is specified, on the filing date. However, if an election specifies an effective date more than 75 days prior to the date on which the election is filed, it will be effective only 75 days prior to the date it was filed. In addition, if an election specifies an effective date more than 12 months from the date on which the election is filed, it will be effective 12 months after the date it was filed. If an election specifies an effective date before January 1, 1997, it will be effective as of January 1, 1997.

The election must be signed by each member of the entity or by an authorized representative who represents to having such authorization under penalties of perjury. A retroactive election must also be signed by every person who was an owner during the period of retroactivity, but is not an owner at the time the election is filed.

A change of classification may constitute a recognition event for U.S. tax purposes.

A taxpayer that makes an entity classification election (other than an election effective on January 1, 1997, or an election by a newly formed entity effective on the date of formation) generally cannot change its classification by election during the sixty months following the effective date of the election. However, the Commissioner may permit a change within that time if more than fifty percent of the ownership has changed since the filing date or effective date of the election.

An eligible entity required to file a federal tax or information return for the taxable year for which an election is made must attach a copy of the Form 8832. If the entity is not required to file a return, a copy of the Form 8832 generally must be attached to the federal income tax return or information return of any direct or indirect owner of the entity. Failure to comply with these filing requirements does not invalidate the election, but the non-filing party may be subject to penalties.

The classification rules in effect prior to January 1, 1997, were found in former Reg. 301.7701–1 through –4.

Under the prior regulations, an entity with associates and an objective to carry on business was classified as a corporation if it had a preponderance of the following factors:

The prior regulations remain applicable prior to January 1, 1997. If an entity incorrectly claimed a classification prior to January 1, 1997, the default classification rule for existing eligible entities in the new regulations could cause a change in entity classification as of January 1, 1997. However, the check-the-box regulations provide that an entity’s claimed classification will be respected for prior periods if:

The prior regulations are relevant under the new regulations in determining the default classification of foreign eligible entities in existence prior to January 1, 1997 with no claimed classification. See section 7.3.1(8).